Wednesday, October 3, 2012

When I last ran this piece in March, the S&P was trading at 1,412, and the mean six month projection based on relative position of the index to its key moving averages was around 1,518 (95% confidence interval of 1,464 - 1,572). Six months later, the S&P closed at 1,447 which was under the 95% band projection. There was a similar under-performance in November of last year. However, the index is higher than it was in March and posted a swing high, which fell inside confidence interval projections.

The 12-month projection from March calls for an even higher move to 1,622. For this to hold true, a powerful 'Santa Rally' would have to exceed what has come before. The low end of the 95% Confidence Interval calls for a push to 1,540, which isn't as far fetched, but requires another 100 points from where the S&P lies now.

But what of the current situation?

As of October 1st, the S&P was trading 6.2% above its 200-day Moving Average, 2.2% above its 50-day MA and was effectively flat (0.1% above) against its 20-day MA.

Historically, this situation has occurred 18 times in the past, with six of those cases clustered during the 1950s (the start date is 1950), and another four in the 1960s. In the past thirty years there have only been five such matches.

During the 1950-60s there was underlying bullish market, punctuated by quite sharp bearish reversals. This give way to the inflationary 1970s, against an underpeforming stock market. Visually, the current situation looks to have more in common with the 70s than the 50s, less the inflation, but there is nothing to suggest a repeat of the go-go 90s!

If we map each individual case of the 18 matches over a 1-year projection, we get the following (average in blue, 95% confidence intervals red/green):

The projection for the next 12 months is mildly bullish. There was an extreme upside of 17%, after 6 months, in 1954. Or a worse case plunge of -13%, as emerged in 1972, for the same 6-month period. The 95% Confidence Interval straddles the zero line and doesn't support a runaway rally for the next 6 or 12 months. It's also unlikely the 12-month projection from March will be fulfilled.

In light of this, the next few months are likely to be quiet, and the 'Santa Rally' - if we have one - will be modest. When Obama was elected, the market swiftly headed south, and his re-election may trigger the same response.

With the June-Oct rally maturing, it's going to be sector pockets which will perform. Health Care was a key beneficiary in recent days, with Technology struggling to keep pace. In the broader view (weekly charts) picture, leading sectors have been Staples and Utilities, both defensive plays. With market leadership coming from defensive sectors, it suggests the current rally is in an end-game scenario. Although the aforementioned projections suggest a period of flatness, rather than an outright decline, is the more likely outcome in the months ahead.

In light of this, there are some targets one can set Alerts for to keep track of things:

Dr. Declan Fallon, Senior Market Technician for Zignals.com, offers a range of stock trading strategies via his Zignals home page. Each Zignals member has an unique home page which they can share with friends and clients to sell their strategies.

When I last ran this piece in March, the S&P was trading at 1,412, and the mean six month projection based on relative position of the index to its key moving averages was around 1,518 (95% confidence interval of 1,464 - 1,572). Six months later, the S&P closed at 1,447 which was under the 95% band projection. There was a similar under-performance in November of last year. However, the index is higher than it was in March and posted a swing high, which fell inside confidence interval projections.

The 12-month projection from March calls for an even higher move to 1,622. For this to hold true, a powerful 'Santa Rally' would have to exceed what has come before. The low end of the 95% Confidence Interval calls for a push to 1,540, which isn't as far fetched, but requires another 100 points from where the S&P lies now.

But what of the current situation?

As of October 1st, the S&P was trading 6.2% above its 200-day Moving Average, 2.2% above its 50-day MA and was effectively flat (0.1% above) against its 20-day MA.

Historically, this situation has occurred 18 times in the past, with six of those cases clustered during the 1950s (the start date is 1950), and another four in the 1960s. In the past thirty years there have only been five such matches.

During the 1950-60s there was underlying bullish market, punctuated by quite sharp bearish reversals. This give way to the inflationary 1970s, against an underpeforming stock market. Visually, the current situation looks to have more in common with the 70s than the 50s, less the inflation, but there is nothing to suggest a repeat of the go-go 90s!

If we map each individual case of the 18 matches over a 1-year projection, we get the following (average in blue, 95% confidence intervals red/green):

The projection for the next 12 months is mildly bullish. There was an extreme upside of 17%, after 6 months, in 1954. Or a worse case plunge of -13%, as emerged in 1972, for the same 6-month period. The 95% Confidence Interval straddles the zero line and doesn't support a runaway rally for the next 6 or 12 months. It's also unlikely the 12-month projection from March will be fulfilled.

In light of this, the next few months are likely to be quiet, and the 'Santa Rally' - if we have one - will be modest. When Obama was elected, the market swiftly headed south, and his re-election may trigger the same response.

With the June-Oct rally maturing, it's going to be sector pockets which will perform. Health Care was a key beneficiary in recent days, with Technology struggling to keep pace. In the broader view (weekly charts) picture, leading sectors have been Staples and Utilities, both defensive plays. With market leadership coming from defensive sectors, it suggests the current rally is in an end-game scenario. Although the aforementioned projections suggest a period of flatness, rather than an outright decline, is the more likely outcome in the months ahead.

In light of this, there are some targets one can set Alerts for to keep track of things:

Dr. Declan Fallon, Senior Market Technician for Zignals.com, offers a range of stock trading strategies via his Zignals home page. Each Zignals member has an unique home page which they can share with friends and clients to sell their strategies.

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